UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q




x
            Quarterly
      report pursuant to section 13 or 15(d) of the Securities Exchange Act
      of 1934.
              For
      the quarterly period ending September 30,
2009




OR





 ̈
            Transition
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act
      of 1934.
              For
      the transition period from
      ________    to ________.




Commission
file number 000-52954




Tongli
Pharmaceuticals (USA), Inc.


(Exact
name of registrant as specified in its charter)




Delaware
              
              84-1090791(State
      or other jurisdiction
                of
      incorporation or organization)
              
              (IRS
      Employer
                Identification
      number)136-17 Maple
      Avenue, 11H
                Flushing,
      NY
              
              11355(Address
      of Principal Executive Offices)
              
              (Zip
      Code)




718-321-8380


(Registrant’s
Telephone Number, Including Area Code)





136-14
Apt. 6D, Northern Blvd., Flushing, New York, NY 11354


(Former
name, former address and former fiscal year, if changed since last
report)





Securities
registered pursuant to Section 12(b) of the Act:





None


(Title of
Class)





Name of
each exchange on which registered





None





Securities
registered pursuant to Section 12(g) of the Act:


Common
Stock, $.001 par value per share





Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.    Yes  x    No   ̈.





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes  ̈    No x





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large
      accelerated filer   ̈
              
              Accelerated
      filer   ̈Non-accelerated
      filer   ̈
              
              Smaller
      reporting company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).    Yes  ̈    No x.





As of
November 13, 2009, there were 10,225,932 outstanding shares of common stock of
the registrant, par value $.001 per share.





TABLE
OF CONTENTS





Cautionary
      Note On Forward Looking Statements
                  
                  
                  -i-Part
      I
                  
                  Financial
      InformationItem
      1.
                  
                  Unaudited
      Condensed Financial Statements
                  
                  
                  1Condensed
      Consolidated Balance Sheets as of September 30, 2009 (Unaudited) and March
      31, 2009
                  
                  
                  1Condensed
      Consolidated Statements of Income and Comprehensive Income (Unaudited) for
      the three months ended September 30, 2009 and 2008 and the six months
      ended September 30, 2009 and 2008
                  
                  
                  2Condensed
      Consolidated Statements of Cash Flows (Unaudited) for the six months ended
      September 31, 2009 and 2008
                  
                  
                  3Notes
      to Unaudited Condensed Consolidated Financial Statements
                  
                  
                  4Item
      2.
                  
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  
                  
                  10Item
      3.
                  
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  
                  
                  20Item
      4T.
                  
                  Controls
      and Procedures
                  
                  
                  20Part
      II
                  
                  Other
      Information
                  
                  
                  22Item
      4.
                  
                  Submission
      of Matters to a Vote of Security Holders
                  
                  
                  22Item
      6.
                  
                  Exhibits
                  
                  
                  22Signatures





Unless
otherwise provided in this Quarterly Report on Form 10-Q, the terms “the
Company,” “the Registrant,” “Tongli,” “we,” “us,” and “our” refer to Tongli
Pharmaceuticals (USA), Inc. and its consolidated subsidiaries.









CAUTIONARY
NOTE ON FORWARD LOOKING STATEMENTS




In
addition to historical information, this Quarterly Report on Form 10-Q contains
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995.  The forward looking statements are subject
to certain risks and uncertainties that could cause actual results to differ
materially from those reflected in such forward looking statements.  In
some cases, you can identify forward looking statements by terminology such as
“may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,”
“estimates,” “predicts,” “projects,” “potential,” “proposed,” “intended,” or
“continue” or the negative of these terms or other comparable
terminology.  Readers are cautioned not to place undue reliance on
these forward looking statements, which reflect management’s opinions only as of
the date thereof. In evaluating such forward looking statements, readers
should carefully review the discussion of risks and uncertainties in this
Quarterly Report on Form 10-Q and in our most recent Annual Report on Form 10-K
as well as in other filings with the Securities and Exchange Commission
including, without limitation, unforeseen changes in the course of research and
development activities; possible changes in cost and timing of development and
testing, capital structure, and other financial items; changes in approaches to
medical treatment; introduction of new products by others; possible acquisitions
of other technologies, assets or businesses; and possible actions by customers,
suppliers, competitors and regulatory authorities.  Although we
believe that the expectations reflected in the forward looking statements are
reasonable, we cannot guarantee future results, growth rates, and levels of
activity, performance or achievements. Except as expressly required by the
federal securities laws, there is no undertaking to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events, changed circumstances or any other reason.





The
discussion of risks and uncertainties set forth in this Quarterly Report on Form
10-Q and in our most recent Annual Report on Form 10-K as well as in other
filings with the SEC, is not necessarily a complete or exhaustive list of all
risks facing the Company at any particular point in time.  We operate
in the People's Republic of China in a highly competitive, highly regulated
and rapidly changing environment.  Therefore, it is likely that new
risks will emerge, and that the nature and elements of existing risks will
change, over time. It is not possible for management to predict all such risk
factors or changes therein, or to assess either the impact of all such risk
factors on our business or the extent to which any individual risk factor,
combination of factors, or new or altered factors, may cause results to differ
materially from those contained in any forward looking statement.  We
disclaim any obligation to revise or update any forward looking statement that
may be made from time to time by us or on our behalf.


-i-


PART
I





Item
1.           Financial
Statements





TONGLI
PHARMACEUTICALS (USA), INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS





September
      30
                          
                          
                          March
      31,2009
                          
                          
                          2009(Unaudited)ASSETSCurrent
      Assets:Cash
                          
                          
                          218,190
                          
                          
                          
                          50,247Accounts
      Receivable
                          
                          
                          536,308
                          
                          
                          
                          395,170Inventory
                          
                          
                          260,981
                          
                          
                          
                          19,016Advance
      to Suppliers
                          
                          
                          1,436,129
                          
                          
                          
                          986,281Total
      Current Assets
                          
                          
                          2,451,608
                          
                          
                          
                          1,450,714Property
      and Equipment, Net
                          
                          
                          6,913,234
                          
                          
                          
                          7,076,746Contract
      Deposit
                          
                          
                          1,029,837
                          
                          
                          
                          1,028,736Total
      Assets
                          
                          
                          10,394,679
                          
                          
                          
                          9,556,196LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      Payable
                          
                          
                          293,352
                          
                          
                          
                          119,643Due
      to Related Parties
                          
                          
                          1,382,735
                          
                          
                          
                          1,063,629Accrued
      Expenses and Other Current Liabilities
                          
                          
                          209,343
                          
                          
                          
                          542,892Total
      Current Liabilities
                          
                          
                          1,885,430
                          
                          
                          
                          1,726,164Stockholders’
      EquityPreferred
      stock, $0.001 par value,Authorized
      1,000,000 shares; none issued
                          
                          
                          -
                          
                          
                          
                          -Common
      stock, $0.001 par value,Authorized
      200,000,000 sharesIssued
      and outstanding - 10,225,932 shares and 10,186,716,
      respectively
                          
                          
                          10,226
                          
                          
                          
                          10,187Additional
      paid in capital
                          
                          
                          6,710,810
                          
                          
                          
                          6,665,349Accumulated
      other comprehensive income
                          
                          
                          1,140,923
                          
                          
                          
                          1,130,285Retained
      earnings
                          
                          
                          647,290
                          
                          
                          
                          24,210Total
      Stockholders’ Equity
                          
                          
                          8,509,249
                          
                          
                          
                          7,830,031Total
      Liabilities and Stockholders’ Equity
                          
                          $
                          10,394,679
                          
                          
                          $
                          9,556,196





See
accompanying notes to the condensed consolidated financial
statements.




1





TONGLI
PHARMACEUTICALS (USA), INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENT OF INCOME AND OTHER COMPREHENSIVE INCOME
(LOSS)


(UNAUDITED)





For
      the three months ended September 30,
                    
                    
                    For
      the six months ended September 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Revenue
                    
                    $
                    546,281
                    
                    
                    $
                    1,645,540
                    
                    
                    $
                    2,893,375
                    
                    
                    $
                    3,310,710Cost
      of Sales
                    
                    
                    333,821
                    
                    
                    
                    926,819
                    
                    
                    
                    1,590,772
                    
                    
                    
                    1,896,959Gross
      Profit
                    
                    
                    212,460
                    
                    
                    
                    718,721
                    
                    
                    
                    1,302,603
                    
                    
                    
                    1,413,751Operating
      Expenses:General
      & Administrative Expenses
                    
                    
                    123,388
                    
                    
                    
                    164,551
                    
                    
                    
                    255,361
                    
                    
                    
                    304,596Research
      & Development
                    
                    
                    -
                    
                    
                    
                    10,175
                    
                    
                    
                    3,461
                    
                    
                    
                    10,175Depreciation
      Expense
                    
                    
                    37,223
                    
                    
                    
                    42,807
                    
                    
                    
                    76,621
                    
                    
                    
                    85,155Selling
      Expense
                    
                    
                    9,928
                    
                    
                    
                    20,613
                    
                    
                    
                    27,857
                    
                    
                    
                    36,188Total
      Operating Expenses
                    
                    
                    170,539
                    
                    
                    
                    238,146
                    
                    
                    
                    363,300
                    
                    
                    
                    436,114Operating
      Income
                    
                    
                    41,921
                    
                    
                    
                    480,575
                    
                    
                    
                    939,303
                    
                    
                    
                    977,637Other
      Income (Expenses):Interest
      Expense (net of interest income)
                    
                    
                    (23,894
                    )
                    
                    
                    (51,839
                    )
                    
                    
                    (41,786
                    )
                    
                    
                    (86,916
                    )Rental
      Income
                    
                    
                    -
                    
                    
                    
                    58,300
                    
                    
                    
                    -
                    
                    
                    
                    101,300Total
      Other Income (Expenses)
                    
                    
                    (23,894
                    )
                    
                    
                    6,461
                    
                    
                    
                    (41,786
                    )
                    
                    
                    14,384Income
      before Income Taxes
                    
                    
                    18,027
                    
                    
                    
                    487,036
                    
                    
                    
                    897,517
                    
                    
                    
                    992,021Income
      Taxes
                    
                    
                    28,856
                    
                    
                    
                    -
                    
                    
                    
                    274,438
                    
                    
                    
                    -Net
      Income (Loss)
                    
                    
                    (10,829
                    )
                    
                    
                    487,036
                    
                    
                    
                    623,079
                    
                    
                    
                    992,021Other
      Comprehensive Item:Foreign
      Currency Translation Adjustment
                    
                    
                    6,086
                    
                    
                    
                    7,763
                    
                    
                    
                    10,638
                    
                    
                    
                    153,881Comprehensive
      Income (Loss)
                    
                    
                    (4,743
                    )
                    
                    
                    494,799
                    
                    
                    
                    633,717
                    
                    
                    
                    1,145,902Basic
      and Diluted Income (Loss) per Share
                    
                    $
                    0.00
                    
                    
                    $
                    0.05
                    
                    
                    $
                    0.09
                    
                    
                    $
                    0.10Basic
      and Diluted Weighted Average Shares Outstanding
                    
                    
                    10,225,932
                    
                    
                    
                    10,033,216
                    
                    
                    
                    10,225,718
                    
                    
                    
                    10,033,216





See
accompanying notes to the condensed consolidated financial
statements.




2





TONGLI
PHARMACEUTICALS (USA), INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)





For
      the six months ended September 30,2009
                          
                          
                          2008Cash
      Flows From Operating ActivitiesNet
      Income
                          
                          $
                          623,079
                          
                          
                          $
                          992,021Adjustments
      to Reconcile Net Income to Net Cash Provided by (used in)Operating
      Activities:Depreciation
      and Amortization
                          
                          
                          170,968
                          
                          
                          
                          171,452Bad
      Debt
                          
                          
                          
                          
                          
                          
                          13,354Amortization
      of Stock Compensation
                          
                          
                          25,500
                          
                          
                          
                          -Accrued
      Interest- Related Party
                          
                          
                          41,801
                          
                          
                          
                          -Stock
      Issued for Services
                          
                          
                          20,000
                          
                          
                          
                          17,500Changes
      in Operating Assets and Liabilities:Accounts
      Receivable
                          
                          
                          (140,631
                          )
                          
                          
                          (23,659
                          )Inventory
                          
                          
                          (241,798
                          )
                          
                          
                          (22,879
                          )Advances
      to Suppliers
                          
                          
                          (448,521
                          )
                          
                          
                          (221,572
                          )Prepaid
      Expenses
                          
                          
                          -
                          
                          
                          
                          (22,023
                          )Accounts
      Payable
                          
                          
                          173,477
                          
                          
                          
                          (246,175
                          )Accrued
      Expenses and other Current Liabilities
                          
                          
                          (333,771
                          )
                          
                          
                          188,350Net
      Cash Provided by (used in) Operating Activities
                          
                          
                          (109,896
                          )
                          
                          
                          846,369Cash
      flows from investing activitiesAcquisition
      of property and equipment
                          
                          
                          
                          
                          
                          
                          (661
                          )Refundable
      deposit related to terminated acquisitions
                          
                          
                          -
                          
                          
                          
                          394,667Contract
      deposit
                          
                          
                          
                          
                          
                          
                          (1,025,514
                          )Payment
      made on Aim Smart acquisition
                          
                          
                          -
                          
                          
                          
                          (276,000
                          )Net
      cash used in investing activities
                          
                          
                          -
                          
                          
                          
                          (907,508
                          )Cash
      Flows From Financing ActivitiesPayment
      of Bank Loans, net
                          
                          
                          
                          
                          
                          
                          (7,899
                          )Proceeds
      from  Related Party Loans
                          
                          
                          277,705
                          
                          
                          
                          64,622Net
      Cash Provided by Financing Activities
                          
                          
                          277,705
                          
                          
                          
                          56,723Effect
      of Exchange Rate Changes on Cash and Cash Equivalents
                          
                          
                          134
                          
                          
                          
                          1,174Net
      Increase (Decrease) in Cash
                          
                          
                          167,943
                          
                          
                          
                          (3,242
                          )Cash
      Balance, beginning of the period
                          
                          
                          50,247
                          
                          
                          
                          130,630Cash
      Balance, end of the period
                          
                          $
                          218,190
                          
                          
                          $
                          127,388Supplemental
      Cash Flow InformationDuring
      the period, cash was paid for the following:Income
      Taxes
                          
                          $
                          450,460
                          
                          
                          $
                          -Interest
      Paid
                          
                          $
                          -
                          
                          
                          $
                          71,916Noncash
      Investing and Financing ActivitiesReduction
      of related party debt in connection with terminated construction
      project
                          
                          $
                          -
                          
                          
                          $
                          588,886Payment
      made by the officer on Aim Smart acquisition
                          
                          $
                          -
                          
                          
                          $
                          249,000





See
accompanying notes to the condensed consolidated financial
statements.




3


TONGLI
PHARMACEUTICALS (USA), INC. AND SUBSIDIARIES
 NOTES
TO CONSENDED CONSOLIDATED FINANCIAL STATEMENTS


1
            BASIS
      OF PRESENTATION





Tongli
Pharmaceuticals (USA), Inc., through a wholly-owned subsidiary, Harbin Tianmu
Pharmaceuticals Co., Ltd. (“Tianmu Pharmaceuticals”), develops, produces and
sells a wide variety of pharmaceuticals and healthcare products in the People’s
Republic of China (“PRC” or “China”) that are based on traditional Chinese
medicine (“TCM”).





The
accompanying unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of the management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months and six
months ended September 30, 2009 and 2008 are not necessarily indicative of the
results that may be expected for the full years. The information included in
this Form 10-Q should be read in conjunction with Management’s Discussion and
Analysis of Financial Condition and Results of Operations and the financial
statements and notes thereto included in the Company’s Annual Report on Form
10-K for the fiscal year ended March 31, 2009.





The
balance sheet as of March 31, 2009 has been derived from the audited financial
statements at that date, but does not include all of the information and
footnotes required by GAAP for the complete financial statements.





The
Company has evaluated events after the date of these financial statements
through November 4, 2009, the date that these financial statements were
issued.  There were no material subsequent events as of that
date.





2
            NEW
      ACCOUNTING PRONOUNCEMENTS





In August
2009, the FASB updated the accounting standards to provide additional guidance
on estimating the fair value of a liability in a hypothetical transaction where
the liability is transferred to a market participant. The standard is effective
for the first reporting period, including interim periods, beginning after the
issuance. The Company does not expect the adoption to have a material effect on
its consolidated results of operations and financial condition.





In
June 2009, FASB established Accounting Standards Codification TM (“ASC”) as
the single source of authoritative accounting principles recognized by the FASB
in the preparation of financial statements in conformity with the GAAP. The
Codification will supersede all then-existing non-SEC accounting and reporting
standards. All other non-grandfathered non-SEC accounting literature not
included in the Codification will become non-authoritative. The Codification is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009. We adopted the new guidance for the quarter ended
September 30, 2009, which changed the way we reference accounting standards in
our disclosures. Adoption of the Codification is not expected to have a material
impact on the Company’s results of operations or financial
position.





In
June 2009, FASB updated the accounting standards related to the
consolidation of variable interest entities (“VIEs”). The standard amends
current consolidation guidance and requires additional disclosures about an
enterprise’s involvement in VIEs. The standard shall be effective as of the
beginning of each reporting entity’s first annual reporting period that begins
after November 15, 2009, for interim periods within the first annual
reporting period, and for interim and annual reporting periods thereafter.
Earlier application is prohibited. The Company does not expect the adoption to
have a material impact on the Company’s results of operations or financial
position.




4




TONGLI
PHARMACEUTICALS (USA), INC. AND SUBSIDIARIES
 NOTES
TO CONSENDED CONSOLIDATED FINANCIAL STATEMENTS


In
May 2009, FASB issued new guidance establishing general standards of
accounting for disclosure of events that occur after the balance sheet date but
before financial statements are issued or are available to be issued, or
subsequent events. An entity should apply the requirements to interim or annual
financial periods ending after June 15, 2009. The Company does not expect
the adoption to have a material impact on the Company’s results of operations or
financial position.





3
            GOING
      CONCERN





The
report of our independent registered public accounting firm on the financial
statements for the fiscal year ended March 31, 2009 includes an explanatory
paragraph indicating substantial doubt as to the Company’s ability to continue
as a going concern. The Company has taken certain actions and continues to
implement changes designed to improve its financial results and operating cash
flows. The actions include certain cost-saving initiatives and continuous
development of new and existing clients.  The Company believes that
these actions will enable it to move towards profitability and improve cash flow
in its continuing operations through the coming year. As of September 30, 2009,
the Company’s working capital has improved to $566,178.





4
            INVENTORY





As of
September 30, 2009 and March 31, 2009, inventory consists of the
following:





September
      30, 2009
                              
                              
                              March
      31, 2009Raw
      materials
                              
                              $
                              55,019
                              
                              
                              $
                              15,100Finished
      goods
                              
                              
                              205,962
                              
                              
                              
                              3,916Total
                              
                              $
                              260,981
                              
                              
                              $
                              19,016




5




TONGLI
PHARMACEUTICALS (USA), INC. AND SUBSIDIARIES
 NOTES
TO CONSENDED CONSOLIDATED FINANCIAL STATEMENTS


5
            PROPERTY
      AND EQUIPMENT





A summary
of property and equipment as of September 30, 2009 and March 31, 2009 is as
follows:





September
      30, 2009
                            
                            
                            March
      31, 2009Building
                            
                            $
                            7,112,874
                            
                            
                            $
                            7,105,308Right
      to use land
                            
                            
                            395,527
                            
                            
                            
                            395,107Machinery
      and equipment
                            
                            
                            1,022,866
                            
                            
                            
                            1,021,778Office
      equipment
                            
                            
                            16,065
                            
                            
                            
                            16,057Vehicle
                            
                            
                            99,411
                            
                            
                            
                            99,305Total
                            
                            
                            8,646,743
                            
                            
                            
                            8,637,555Less:
      accumulated depreciation and amortization
                            
                            
                            1,733,509
                            
                            
                            
                            1,560,809Total
                            
                            $
                            6,913,234
                            
                            
                            $
                            7,076,746





6
            CONTRACT
      DEPOSIT





Contract
deposit represents a payment under a material contract by which the Company
intends to purchase a formula for a nutraceutical product. The Company’s ability
to conclude this purchase and ultimately commercialize this product requires,
among other things, additional assistance from the seller and obtaining
government approvals. The Company is now still waiting for governmental approval
for the formula to be used in production of Calcium supplements and is
expected to obtain such approval from the China State Food & Drug
Administration (“SFDA”) by the end of 2009.





7
            DUE
      TO RELATED PARTIES





Amounts
due to related parties consist of the following:


September
      30, 2009
                          
                          
                          March
      31, 2009Harbin
      Tianmu Real Estate Development Co., Ltd. (a)
                          
                          $
                          (1,014,348
                          )
                          
                          $
                          (688,808
                          )Chairman
      of the Company (a)
                          
                          
                          (347,800
                          )
                          
                          
                          (354,234
                          )US
      Hua Sky International Investment LLC. (b)
                          
                          
                          (20,587
                          )
                          
                          
                          (20,587
                          )Total
                          
                          $
                          (1,382,735
                          )
                          
                          $
                          (1,063,629
                          )





(a)
            These
      loans bear 7% interest rate per annum and are due on
    demand.





(b)
            The
      Company had a month to month sub-lease arrangement for its New York office
      with a company owned by its Chairman. This arrangement began on March 31,
      2008 and the monthly rental was $3,950 which was the same as the amount
      incurred by the related entity. This arrangement ended on March 31, 2009.
      Started on April 1, 2009, a new lease agreement with a monthly rental of
      $1,950 under the name of the chairman has been arranged for the Company’s
      New York office.




6




TONGLI
PHARMACEUTICALS (USA), INC. AND SUBSIDIARIES
 NOTES
TO CONSENDED CONSOLIDATED FINANCIAL STATEMENTS




8
            STOCKHOLDERS’
      EQUITY




On March
16, 2009, the Company issued 100,000 shares of common stock to a consultant. The
Company’s contract with this consultant has a term of one year, and the unearned
stock compensation will be amortized as expense over one year term from the date
of the grant. The amortization of this stock compensation for the three and six
months ended September 30, 2009 were $25,500 and $12,750,
respectively.






On April
1, 2009, the Company issued 39,216 shares of common stock to a law firm for
legal services rendered and recorded at its fair value of $20,000. As of
September 30, 2009, there were 10,225,932 shares of common stock issued and
outstanding and no preferred stock issued and outstanding.




9
            EARNINGS
      PER SHARE




Earnings
(loss) per share are computed by dividing income available to stockholders of
our common stock by the weighted-average number of shares of common stock
outstanding for the three and six months ended September 30, 2009 and 2008.
Diluted earnings per share is computed similar to basic earnings per share
except that the denominator is increased to include the number of additional
shares of common stock that would have been outstanding if the potential shares
of common stock have been issued and if the additional shares of common stock
were dilutive. There are no common stock equivalents available for dilution
purposes as of September 30, 2009 and 2008, respectively. The following
demonstrates the calculation for earnings per share for the three and six months
ended September 30, 2009 and 2008:




Six
      Months EndedSeptember
      30, 2009
                            
                            
                            September
      30, 2008Net
      income
                            
                            $
                            623,079
                            
                            
                            $
                            992,021Weighted
      shares outstanding- basic and diluted
                            
                            
                            10,225,718
                            
                            
                            
                            10,033,216Earning
      per share- basic and diluted
                            
                            $
                            0.09
                            
                            
                            $
                            0.10




Three
      Months EndedSeptember
      30, 2009
                            
                            
                            September
      30, 2008Net
      income (loss)
                            
                            $
                            (10,829
                            )
                            
                            $
                            487,036Weighted
      shares outstanding- basic and diluted
                            
                            
                            10,225,932
                            
                            
                            
                            10,033,216Earning
      per share- basic and diluted
                            
                            $
                            -
                            
                            
                            $
                            0.05




10
            TAXES





(a)
              Corporation
      income tax (“CIT”)





The
Company has not recorded a provision for U.S federal income tax for the three
months and six months ended September 30, 2009 due to the net operating loss
carry-forward in the United States which the Company has set up a 100% valuation
allowance.





The
Company’s Chinese subsidiaries are governed by the Income Tax Law of the PRC
concerning the private-run enterprises, which are generally subject to tax at a
new statutory rate of 25% on income reported in the statutory financial
statements after appropriate tax adjustments.





As of
September 30, 2009, the Company had approximately $850,000 and $0 of net
operating loss carry-forward for income tax purposes in the United States and
China respectively.




7


TONGLI
PHARMACEUTICALS (USA), INC. AND SUBSIDIARIES
 NOTES
TO CONSENDED CONSOLIDATED FINANCIAL STATEMENTS


10
            TAXES
      (Continued)





For the
six months ended September 30, 2009 and 2008 respectively, a reconciliation of
tax at United States federal statutory rate to provision for income tax recorded
in the financial statements is as follows:




As
      ofSeptember
      30, 2009
                                
                                
                                September
      30, 2008U.S.statutory
      income tax rate
                                
                                
                                35.0
                                %
                                
                                
                                35.0
                                %Foreign
      tax rate difference between US and China
                                
                                
                                (10.0
                                %)
                                
                                
                                (10.0
                                %)Effect
      of tax deduction due to NOL from China
                                
                                
                                0.0
                                %
                                
                                
                                (25
                                %)NOL
      from U.S. with 100% valuation allowance
                                
                                
                                5.5
                                %
                                
                                
                                -Actual
      consolidated income tax rate
                                
                                
                                30.5
                                %
                                
                                
                                0.0
                                %




Deferred
income taxes reflect the net effects of temporary differences between the
carrying amounts of assets and liabilities for financial statement purposes and
the amounts used for income tax purposes, and operating loss
carry-forwards.




The
components of deferred taxes as of September 30, 2009 and March 31, 2009 consist
of the following:




As
      ofSeptember
      30, 2009
                    
                    
                    March
      31, 2009Net
      operating loss carry-forwards in the United States
                    
                    
                    297,332
                    
                    
                    
                    208,732Valuation
      allowance
                    
                    
                    (297,332
                    )
                    
                    
                    (208,732
                    )Net
      deferred tax asset
                    
                    
                    -
                    
                    
                    
                    -




(b)
Value added tax (“VAT”)





Enterprises
or individuals who sell commodities, engage in repair and maintenance or import
or export goods in the PRC are subject to a value added tax in accordance with
the PRC laws. The value added tax standard rate is 17% of the gross sales price.
A credit is available whereby VAT paid on the purchases of semi-finished
products or raw materials used in the production of the Company’s finished
products can be used to offset the VAT due on the sales of the finished
products.




(3)
Other taxes





The
Company is also subject to 5% Business Tax, 7% City Construction Tax and 4%
Education Fees based on VAT.




8




TONGLI
PHARMACEUTICALS (USA), INC. AND SUBSIDIARIES
 NOTES
TO CONSENDED CONSOLIDATED FINANCIAL STATEMENTS




11
            COMMITMENTS
      AND CONTINGENCIES





The
Company entered into agreements with three distributors to provide agreed upon
amounts of products at pre-agreed pricing.  These agreements expire in
March 2010. In the event a distributor does not purchase a fixed percentage of
the agreed upon amounts for three consecutive months, the Company may terminate
the agreement.  In addition, one agreement provides, among other
things, that the distributor can become the exclusive distributor for a
geographical area if certain sales targets are met. Revenues for the six months
ended September 30, 2009 and 2008 were immaterial from these
agreements.





Tianmu
Pharmaceuticals leased a portion of its facility to a pharmaceutical college at
a monthly rental of approximately $13,400 (RMB100, 000) from June 2007 through
September 30, 2008 and $23,300 (RMB160, 000) from October 1, 2008 through March
31, 2009.  On March 31, 2008 approximately $102,700 of rents was
unpaid due to the school’s limited revenues. On March 31, 2008, the Company
recorded a 100% reserve against this receivable. During the fiscal year ended
March 31, 2009, the Company recovered $14,700 unpaid rent from prior period and
the balance of the reserve against the rent receivable was approximately $88,000
as of March 31, 2009. Since March 31, 2009, the facility became vacant and
available to the Company for future operations. As the today of this Quarterly
Report on Form 10-Q, the outstanding rent has been paid off. No rental income
was generated from the facility for the three months and six months ended
September 30, 2009, respectively.





12
            VULNERABILITY
      DUE TO OPERATIONS IN PRC





The
Company’s operations may be adversely affected by significant political,
economic and social uncertainties in the PRC.  Although the PRC
government has been pursuing economic reform policies for more than thirty
years, no assurance can be given that the PRC government will continue to pursue
such policies or that such policies may not be significantly altered, especially
in the event of a change in leadership, social or political disruption or
unforeseen circumstances affecting the PRC’s political, economic and social
conditions.  There is also no guarantee that the PRC government’s
pursuit of economic reforms will be consistent or effective.





Substantially
all of the Company’s businesses are transacted in RMB, which is not freely
convertible.  The Peoples Bank of China or other banks are authorized
to buy and sell foreign currencies at the exchange rates quoted by the Peoples
Bank of China.  Approval of foreign currency payments by the Peoples
Bank of China or other institutions requires submitting a payment application
form together with suppliers’ invoices, shipping documents and signed
contracts.





Since the
Company has its primary operations in the PRC, the majority of its revenues will
be settled in RMB, not U.S. Dollars. Due to certain restrictions on currency
exchanges that exist in the PRC, the Company’s ability to use revenue generated
in RMB to pay any dividend payments to its shareholders outside of China may be
limited.





The
Company’s business depends on maintaining licenses of its current products from
SFDA.  Obtaining licenses for additional products can be expensive and
is usually time consuming.  Failure to obtain the required licenses
can cause the Company’s business plan to be delayed.  If the delays
prevent the Company from generating positive cash flows or introducing a
significant number of products, there will be a material adverse effect on the
Company.




9




Item 2.MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS





The
following discussion and analysis of financial condition and results of
operations relates to the operations and financial condition reported in the
financial statements of Tongli Pharmaceuticals(USA) Inc. for the three months
ended September 30, 2009 and 2008 and six months ended September 30, 2009 and
2008, and should be read in conjunction with such financial statements and
related notes included in this report. Those statements in the following
discussion that are not historical in nature should be considered to be forward
looking statements that are inherently uncertain. Actual results and the timing
of the events may differ materially from those contained in these forward
looking statements due to a number of factors, including those discussed in the
“Cautionary Note on Forward Looking Statements” set forth above.





COMPANY
OVERVIEW





Tongli
Pharmaceuticals (USA), Inc. ( the “Company”), formally known as Aim Smart
Corporation (“Aim Smart”), was originally formed in the State of Colorado in
April 1998 and reorganized as a Delaware corporation in September
2007.





On July
29, 2008, Aim Smart acquired all of the outstanding capital stock of American
Tony Pharmaceutical, Inc., a Delaware corporation (“American Tony”), by issuing
9,700,000 shares of its common stock, representing 96.7% of the outstanding
shares of Aim Smart, to the shareholders of American Tony. American Tony paid
$525,000 for its controlling interest in Aim Smart and this interest was
acquired solely to effectuate the reverse merger and was paid for with $276,000
of the Company’s own funds and a $249,000 loan from
its Chairman.





The
acquisition has been accounted for as a reverse merger under the purchase method
of accounting since there was a change of control. Accordingly, American Tony is
treated as the continuing entity for accounting purposes, whereas the entity
formally known as Aim Smart is the legal surviving entity.





Subsequent
to the reverse merger, Aim Smart changed its name to American Tony
Pharmaceuticals, Inc. on September 23, 2008, and then changed its name to Tongli
Pharmaceuticals (USA), Inc. on October 30, 2008.





American
Tony is a holding company incorporated in the State of Delaware. In February
2007, American Tony acquired, through a wholly-owned subsidiary, Heilongjiang
Tongli Technology Co., Ltd. (“TT”), all of the registered capital of Harbin
Tianmu Pharmaceuticals Co., Ltd. (“HTP”), a corporation organized under the laws
of the PRC on November 26, 1999. HTP is engaged in
developing, manufacturing and marketing pharmaceutical and health care
products that incorporate elements of Chinese Traditional Medicine with elements
of western medicine. Our research and development activities have been carried
out at relatively low cost because they have been carried out by our in house
research and development team and, in the past, in concert with a number of
research institutes and universities, including the Jilin Research Institute of
Chinese Traditional Medicine, the Sichuan Research Institute of Chinese
Medicine, the Heilongjiang Institute of Chinese Traditional Medicine, the
Chemistry Department of Tsinghua University, and the R&D Center of Harbin
Medical University.





In 2005,
HTP obtained the GMP certificate (Good Manufacturing Practices for
Pharmaceutical Products), and Drug Register License and Drug Production
Certificate from the SFDA for its 10 products.  The Company’s main
products include cholesterol reduction pill, mouthwash, anti-inflammatory tablet
and calcium supplement. These products are sold through distributors or directly
to customers; no service is required of the Company after sales are made.
The Company’s primary customers are drug stores and hospitals located in
China.




10




GOING
CONCERN





The
report of our independent registered public accounting firm on the financial
statements for the year ended March 31, 2009 includes an explanatory paragraph
indicating substantial doubt as to the our ability to continue as a going
concern. We have taken certain actions and continue to implement changes
designed to improve our financial results and operating cash flows. The actions
include certain cost-saving initiatives and continuous development of new and
existing clients.  We believe that these actions will enable us to
move towards profitability and improve cash flows in our continuing operations
through the coming year. As of September 30, 2009, our working capital has
improved to $566,178.





DEVELOPMENT
AND STRATEGY




For the
three months ended September 30, 2009, our operating results were not as good as
expected. Our sales revenue decreased due to the general slowdown of the economy
growth in China as well as the seasonal production suspension and our factory
facility maintenance arranged in August 2009. The uncertainties of the Health
Care Reforms in China also have affected the confidence of many of our regional
distributors. As a result, these distributors have cut their orders with
our company within this quarter ended September 30,
2009.  Accordingly, as production and sales promotion as well as
advertising campaign activities were reduced, sales of major products went down
during the three months ended September 30, 2009. The combined results for the
six months ended September 30, 2009 still reflected profitability, but
management does not know whether this trend will continue. In order to achieve a
better operating performance for the remainder of this fiscal year and beyond,
we will endeavor to continue the execution of our product channel expansion
strategy which we believe may result in increased market penetration of our
products and expanded revenue growth.  Management also plans to
emphasize expanded and enhanced marketing and sales for the remainder of this
fiscal year and beyond. Part of this strategy involves increasing and
improving marketing and sales activities to enhance the market position of our
key products and to increase the sales of other products by expanding our sales
force, solidifying our distribution network and expanding market segment
coverage, and increasing marketing and promotional activities. Management also
plans to selectively pursue strategic acquisition opportunities to further
consolidate our resources and expand our market coverage.  We believe
that such initiatives will provide effective means to broaden our product lines,
expand our market coverage and complement our research and development
capabilities. As of the date of this report the company is not negotiating with
anyone regarding the potential acquisition.




Management
believes that our emphasis on further commercializing and broadening our product
lines, and enhanced sales and marketing efforts will yield increases in revenue
for the remainder of this fiscal year and beyond.





CRITICAL
ACCOUNTING POLICIES AND ESTIMATES





The
consolidated financial information has been prepared in accordance with
generally accepted accounting principles in the United States, which requires us
to make judgments, estimates and assumptions that affect (1) the reported
amounts of our assets and liabilities, (2) the disclosure of our contingent
assets and liabilities at the end of each fiscal period and (3) the reported
amounts of revenues and expenses during each fiscal period.  We
continually evaluate these estimates based on our own historical experience,
knowledge and assessment of current business and other conditions, our
expectations regarding the future based on available information and reasonable
assumptions, which together form our basis for making judgments about matters
that are not readily apparent from other sources.  Since the use of
estimates is an integral component of the financial reporting process, the
actual results could differ from those estimates.  Some of accounting
policies require a higher degree of judgment than others in their
application.





When
reviewing the financial statements, you should consider (1) the selection of
critical accounting policies, (2) the judgment and other uncertainties affecting
the application of those policies, and (3) the sensitivity of reported results
to changes in conditions and assumptions.  We believe the following
accounting policies involve the most significant judgment and estimates used in
the preparation of our financial statements.




11




Basis
of presentation





The
accompanying unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of the management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months and six
months ended September 30, 2009 and 2008 are not necessarily indicative of the
results that may be expected for the full years. The information included in
this Form 10-Q should be read in conjunction with Management’s Discussion and
Analysis of Financial Condition and Results of Operations and the financial
statements and notes to thereto included in the Company’s Annual Report on Form
10-K for the fiscal year ended March 31, 2009.





The
balance sheet as of March 31, 2009 has been derived from the audited financial
statements at that date, but does not include all of the information and
footnotes required by GAAP for the complete financial statements.





Principles
of consolidation





The
consolidated financial statements include the accounts of Tongli, American Tony,
TT and HTP.  All significant inter-company accounts and transactions
have been eliminated.





Revenue
Recognition





We
recognize revenue at the date of shipment to customers when a formal arrangement
exists, the price is fixed or determinable, the delivery is completed, and no
other significant obligations by us exist and collectability is reasonably
assured.  Payments received before all of the relevant criteria for revenue
recognition are satisfied are recorded as advances from customers.





DISCUSSION
OF OPERATING RESULTS





The
results of our operation for the three and six months ended September 30, 2009
compared to the prior comparative periods are as follows:





Three
Months Ended September 30, 2009 compared to Three Months Ended September 30,
2008





The
results of our operation for the three months ended September 30, 2009 compared
to the three months ended September 30, 2008 are as follows:


12





For the three months endedSeptember30,2009
                  
                  
                  September30,2008Revenues
                  
                  $
                  546,281
                  
                  
                  $
                  1,645,540Cost
      of Sales
                  
                  
                  333,821
                  
                  
                  
                  926,819Gross
      Profit
                  
                  
                  212,460
                  
                  
                  
                  718,721Selling,
      general & administrative expeses
                  
                  
                  170,539
                  
                  
                  
                  238,146Other
      income (expenses)
                  
                  
                  (23,894
                  )
                  
                  
                  6,461Provision
      of income taxes
                  
                  
                  28,856
                  
                  
                  
                  -Net
      income (loss)
                  
                  
                  (10,829
                  )
                  
                  
                  487,036Foreign
      currency translation adjustments
                  
                  
                  6,087
                  
                  
                  
                  7,763Comprehensive
      income (loss)
                  
                  $
                  (4,743
                  )
                  
                  $
                  494,799





Revenues,
cost of sales and gross profit





Revenues
decreased 66.8% to approximately $0.54 million for the three months ended
September 30, 2009 as compared to approximately $1.64 million for the same
period ended September 30, 2008.  The $1.09 million decrease was
mainly attributable to the general slowdown of the economy in China as well as
the seasonal production suspension and our factory facility maintenance in
August 2009. The uncertainties of the Health Care Reforms in China, which are
designed to improve health-care infrastructure and coverage for an aging
population and 800 million rural residents as well as to spur domestic
consumption to offset the effect of dwindling exports, also have affected the
confidence of many of our regional distributors. As a result, these distributors
have cut their orders with our company during the quarter ended September
30, 2009.  Accordingly, as production and sales promotion as well as
advertising campaign activities were reduced, sales of our major products went
down in the three months ended   September 30,
2009.  Management expects that our emphasis on broadening our product
pipeline coupled with our continued sales channel expansions, along with our
enhanced sales and marketing efforts, will yield increases in revenue for the
remainder of this fiscal year and beyond.





Cost of
sales was approximately $0.33 million for the three months ended September 30,
2009 as compared to $0.92 million for the same period ended September 30, 2008.
The $0.59 million decrease in cost of sales was mainly attributable to the
decreased sales of our products in the three months ended September 30,
2009.





Gross
profit was $212,460 for the three months ended September 30, 2009, as compared
to $718,721 for the three months ended September 30, 2008, a decrease of $0.5
million due to decreased sales in the quarter ended September 30,
2009.  The gross profit as a percent of revenues for the three months
ended September 30, 2009 decreased to 38.89% compared to 43.67% in the same
period in 2008.  The decrease in cost of sales as a percentage of
revenue was primarily attributed to reduced usage of factory overhead due to
production suspension and facility maintenance in the quarter ended September
30, 2009, somewhat offset by a better management of  raw material and
more efficient control in labor costs.


13





Operating
expenses





Total
operating expenses decreased to $170,539 for the three months ended September
30, 2009 from $238,146 for the three months ended September 30,
2008.  As a percentage of revenues, operating expenses increased to
31.22% for the three months ended September 30, 2009 compared to 14.47% for the
three months ended September 30, 2008. The decrease in total operating expenses
was attributed to the production suspension and facility maintenance arranged in
August 2009 which reduced general administration, selling and research and
development activities and related expenses. The changes in operating expenses
are summarized below.





For the three months endedSeptember 30, 2009
                  
                  
                  September 30, 2008General
      & administrative expenses
                  
                  $
                  123,388
                  
                  
                  $
                  164,551Research
      & development
                  
                  
                  -
                  
                  
                  
                  10,175Depreciation
      and amortization expenses
                  
                  
                  37,223
                  
                  
                  
                  42,807Selling
      expenses
                  
                  
                  9,928
                  
                  
                  
                  20,613Total
      Operating expenses
                  
                  $
                  170,539
                  
                  
                  $
                  238,146





Interest
expense





Net
interest expense was $23,894 for the three months ended September 30, 2009
compared to $51,839 for the three months ended September 30, 2008. The decrease
of $27,945 in net interest expense for the three months ended September 30, 2009
as compared to the same period in 2008 was due to the repayment of all the bank
loans as of March 31, 2009. The only interest expense relates to the
loans from related parties.





Income
taxes





The
majority of our net income for the three months ended September 30, 2009 was
from HTP, which conducts substantially all of our operation in the PRC. Our
Chinese subsidiaries are governed by the Income Tax Law of the PRC concerning
the private-run enterprises, which are generally subject to tax at a new
statutory rate of 25% on income reported in the statutory financial statements
after appropriate tax adjustments.





The
income tax expense of $28,856 for the three months ended September 30, 2009 was
attributed to the income primarily derived from HTP. No provision for income
taxes is required as a result of the utilization of net operating loss
carry-forwards for the three months ended September 30,
2008.


14


Net
income





As a
result of the above factors, we reported a net loss of $10,829 for the three
months ended September 30, 2009, a decrease of $497,865, as compared to a net
income of $487,036 for the three months ended September 30, 2008. The decrease
in our net income was primarily due to our decreased sales revenues for the
quarter ended September 30, 2009.





Other
comprehensive income





We
operate primarily in the PRC and the functional currency of our operating
subsidiary is the Chinese Renminbi (“RMB”).   RMB is not freely convertible
into foreign currency and all foreign exchange transactions must take place
through authorized institutions. No representation is intended to imply that the
Renminbi amounts could have been, or could be, converted, realized or settled
into U.S. dollars at that rate on September 30, 2009, or at any other
date.





Translation
adjustments resulting from this process amounted to $6,086 and $7,763 for the
three months ended September 30, 2009 and 2008, respectively.  The
balance sheet amounts with the exception of equity at September 30, 2009 were
translated at 6.8263 RMB to 1.00 USD as compared to 6.7899 RMB to 1.00 USD at
September 30, 2008. The equity accounts were stated at their historical rate.
The average translation rates applied to the income statements accounts for the
three months ended September 30, 2009 and 2008 were 6.8309 RMB and 6.8377 RMB,
respectively.





Six
Months Ended September 30, 2009 compared to Six Months Ended September 30,
2008





The
results of our operation for the six months ended September 30, 2009 compared to
the six months ended September 30, 2008 are as follows:





For the six months endedSeptember30,2009
                  
                  
                  September30,2008Revenues
                  
                  $
                  2,893,375
                  
                  
                  $
                  3,310,710Cost
      of Sales
                  
                  
                  1,590,772
                  
                  
                  
                  1,896,959Gross
      Profit
                  
                  
                  1,302,603
                  
                  
                  
                  1,413,751Selling,
      general & administrative expeses
                  
                  
                  363,300
                  
                  
                  
                  436,114Other
      income (expenses)
                  
                  
                  (41,786
                  )
                  
                  
                  14,384Provision
      of income taxes
                  
                  
                  274,438
                  
                  
                  
                  -Net
      income
                  
                  
                  623,079
                  
                  
                  
                  992,021Foreign
      currency translation adjustments
                  
                  
                  10,638
                  
                  
                  
                  153,881Comprehensive
      income
                  
                  $
                  633,717
                  
                  
                  $
                  1,145,902


15





Revenues,
cost of sales and gross profit





Revenues
decreased 12.60% to approximately $2.89 million for the six months ended
September 30, 2009 as compared to approximately $3.31 million for the same
period ended September 30, 2008.  The $ 0.41 million decrease was
mainly attributable to the general slowdown of the economy in China as well as
the seasonal production suspension and our factory facility maintenance arranged
in August 2009.  The uncertainties of the Health Care Reforms in
China, which are designed to improve to health-care infrastructure and coverage
for an aging population and 800 million rural residents as well as to spur
domestic consumption to offset the effect of dwindling exports, also have
affected the confidence of many of our regional distributors. As a result, these
distributors have cut their orders with our company during the second
quarter ended September 30, 2009.  Accordingly, as production and
sales promotion as well as advertising campaign activities were reduced, sales
of major products went down in the second quarter ended September 30,
2009.  Management expects that our emphasis on broadening our product
pipeline coupled with our continued sales channel expansions, along with our
enhanced sales and marketing efforts, will yield increases in our revenue for
the remainder of this fiscal year and beyond.





Cost of
sales was approximately $1.59 million for the six months ended September 30,
2009 as compared to $1.89 million for the same period ended September 30, 2008.
The $0.30 million decrease in cost of sales was mainly attributable to the
decreased sales of our product in the three months period ended September 30,
2009.





Gross
profit was approximately $1.30 million for the six months ended September 30,
2009, as compared to $1.41 million for the six months ended September 30, 2008,
a decrease of $0.11 million due to decreased sales in the second quarter ended
September 30, 2009.  The gross profit as a percent of revenues for the
six months ended September 30, 2009 increased to 45.02% compared to 42.70% in
the same period in 2008.  The decrease in cost of sales as a
percentage of revenue was primarily attributed to reduced use of factory
overhead due to facility maintenance during the downtime, better management of
raw material and more efficient control in labor costs. We expect our gross
profit margin will recover to its normal level with slight growth in the future
if does increase.





Operating
expenses





Total
operating expenses decreased to $363,300 for the six months ended September 30,
2009 from $436,114 for the six months ended September 30, 2008.  As a
percentage of revenues, operating expenses decreased to 12.56% for the six
months ended September 30, 2009 compared to 13.17% for the six months ended
September 30, 2008. The decrease in total operating expenses was because the
production suspension and facility maintenance arranged in August 2009 reduced
general administration, selling and research and development activities and
related expenses. However, in terms of operating expense as a percentage of
revenues, relatively high operating expenses for the six months ended September
30, 2009 were disproportionate to the sliding sales revenue. This is because
some fixed expenses such as depreciation and general administration expenses
were unavoidable, even if the production and sales activities reduced during the
summer season when production facilities were under maintenance. The changes in
operating expenses are summarized below.


16





For the six months endedSeptember 30, 2009
                  
                  
                  September 30, 2008General
      & administrative expenses
                  
                  $
                  255,361
                  
                  
                  $
                  304,596Research
      & development
                  
                  
                  3,461
                  
                  
                  
                  10,175Depreciation
      and amortization expenses
                  
                  
                  76,621
                  
                  
                  
                  85,155Selling
      expenses
                  
                  
                  27,857
                  
                  
                  
                  36,188Total
      Operating expenses
                  
                  $
                  363,300
                  
                  
                  $
                  436,114





Interest
expense





Net
interest expense was $41,786 for the six months ended September 30, 2009
compared to $86,916 for the six months ended September 30, 2008. The decrease of
net interest expense for the six months ended September 30, 2009 was due to the
repayment of all the bank loans as of March 31, 2009. The only
interest expenses relates tothe loans from related
parties.





Income
taxes





The
majority of our net income for the six months ended September 30, 2009 was from
Harbin Tianmu Pharmaceuticals, which conducts substantially all of our
operations in the PRC. Our Chinese subsidiaries are governed by the Income Tax
Law of the PRC concerning the private-run enterprises, which are generally
subject to tax at a new statutory rate of 25% on income reported in the
statutory financial statements after appropriate tax adjustments.





The
income tax expense of $274,438 for the six months ended September 30, 2009 was
attributed to the income primarily derived from HTP. No provision for income
taxes is required as a result of the utilization of net operating loss
carry-forwards for the six months ended September 30,
2008.





We have
not recorded a provision for U.S federal income tax for the six months ended
September 30, 2009 due to the net operating loss carry forward in the United
States which we have set up a 100% valuation allowance.





Net
income





As a
result of the above factors, we reported a net income of $623,079 for the six
months ended September 30, 2009, a decrease of $368,942, as compared to a net
income of $992,021 for the six months ended September 30, 2008. The decrease in
our net income was primarily due to our decreased sales revenues for the second
quarter ended September 30, 2009.


17


Other
comprehensive income





We
operate primarily in the PRC and the functional currency of our operating
subsidiary is the Chinese Renminbi (“RMB”).  RMB is not freely convertible
into foreign currency and all foreign exchange transactions must take place
through authorized institutions.  No representation is intended to
imply that the Renminbi amounts could have been, or could be, converted,
realized or settled into U.S. dollars at that rate on September 30, 2009, or at
any other date.





Translation
adjustments resulting from this process amounted to $10,638 and $153,881 as of
September 30, 2009 and 2008, respectively.  The balance sheet amounts
with the exception of equity at September 30, 2009 were translated at 6.8263 RMB
to 1.00 USD as compared to 6.7899 RMB to 1.00 USD at September 30, 2008. The
equity accounts were stated at their historical rate. The average translation
rates applied to the income statements accounts for the periods ended September
30, 2009 and 2008 were 6.8304 RMB and 6.8972 RMB, respectively.





Liquidity
and Capital Resources




Liquidity
is the ability of a company to generate funds to support its current and future
operations, satisfy its obligations and otherwise operate on an ongoing
basis.  We usually finance our operation and capital expenditures
through short-term bank loans as well as loans from the members of our
management group and advances from another entity owned by our
Chairman.





The
report of our independent registered public accounting firm on the financial
statements for the year ended March 31, 2009 includes an explanatory paragraph
indicating substantial doubt as to the our ability to continue as a going
concern. We have taken certain actions and continue to implement changes
designed to improve our financial results and operating cash flows. The actions
include certain cost-saving initiatives and continuous development of new and
existing clients.  We believe that these actions will enable us to
move towards profitability and improve cash flows in our operations through the
coming year. As of September 30, 2009, our working capital has improved to
$566,178 and the operating results for the six months ended September 30, 2009
reflect profitability.





Total
current assets increased to approximately $2.45 million as of September 30,
2009 from $1.45 million as of March 31, 2009.  The primary changes in
our current assets during this period were in cash, accounts receivables,
inventory and advance to suppliers. The increase of cash and cash equivalent
from $50,247 as of March 31, 2009 to $218,190 as of September 30, 2009 was due
to production activities reduced in the summer season due to facility
maintenance which lowered the amount of cash used in raw materials purchase and
inventory stockpile. The increase of accounts receivables from $395,170 as of
March 31, 2009 to $536,308 as of September 30, 2009 was due to our extended
credit to distributors in support of their sales of our products. The necessity
to have raw materials available when needed causes us to advance cash to
suppliers and increase inventory stock for the six months ended September 30,
2009.  This drain on our cash will remain unless we are able to secure a
proprietary source for the volatile herbs that are a large portion of our raw
material purchases. The increase of inventory from $19,016 as of March 31, 2009
to $260,981 as of  September  30, 2009 was due to the
consideration of stocking raw materials to avoid the potential material shortage
in the near future, and stock finished goods in support of future sales. The
increase of advance to suppliers from $986,281 as of March 31, 2009 to
$1,436,129 as of September 30, 2009 was attributed to our financial support
to strengthen the relationship with our raw material suppliers.


18


Current
liabilities as of September 30, 2009 totaled $1.88 million as compared to
$1.72 million at March 31, 2009. The increase in current liabilities was
primarily due to increase in accounts payable and related party borrowings.
Balance sheet as of September 30, 2009 reflects a balance due to related parties
of $1,382,735 which represented working capital advances made to us by the
Chairman as well as companies owned by the Chairman. The increase of related
party loans by the amount of $319,106 as compared to that of March 31, 2009 was
primarily due to increased cash demand by the Company’s U.S. entity to maintain
its normal business operation. These advances are interest bearing and are due
on demand.





The
growth of our company will require additional debt and/or equity financing.
 Currently we have budgeted $3.5 million for capital improvements. We
intend to pursue additional debt financing which could be secured by our
property and equipments and approach international equity markets for additional
debt and/or equity financing.  To date we have no commitment from any
source for the funds we require.





Discussion
of Cash Flow





Comparison
of cash flows results for the quarters ended September 30, 2009 and 2008
respectively is summarized as follows:





For
      the six months ended2009
                  
                  
                  2008Cash
      flow from operating activities
                  
                  $
                  (109,896
                  )
                  
                  $
                  846,369Cash
      flow from investing activities
                  
                  $
                  -
                  
                  
                  $
                  (907,508
                  )Cash
      flow from financing activities
                  
                  $
                  277,705
                  
                  
                  $
                  56,723





Operating
activities





Cash used
in operating activities during the six months ended September 30, 2009
amounted to $109,896, which consists of a net income of $623,079 ,adds back
noncash adjustments of $258,269 and offset by net changes in operating assets
and liabilities due to expanded operating activities, including increase in
accounts receivables in the amount of $140,631, increase in inventory of
$241,798, increase in advance to suppliers in the amount of $448,521 to
stimulate sales and maintain good relationship with the suppliers, as well as an
decrease in accrued liabilities in the amount of $333,771, offset by an increase
in accounts payable of $173,477.  Cash provided by operating
activities in the six months ended September 30, 2008 amounted to $846,369,
which consist of a net income of $992,021 increased by noncash adjustments of
$202,306 and net changes in operating assets and liabilities, primarily
including increase of advance of $221,572 to suppliers to maintain good
relationship with the suppliers, a decrease in accounts payable in the amount of
$246,175 and offset by increase in other accrued liabilities in the amount of
$188,350. Cash flows from operations for the six months ended September 30, 2009
decreased by $958,365 or 113.2% compared to the same period in
2008.  The decrease in cash as of September 30, 2009 was mainly
attributable to our decreased sales revenue and an increase in current assets
which reduced our cash.





Investing
activities





Cash used
in investing activities amounted to $0 in the six months ended
September 30, 2009.  Cash used in investing activities amounted
to $907,508 for the six months ended September 30, 2008, which consists of
payment to acquire patent right of $1,025,514, payment made on Aim Smart
acquisition in the amount of $276,000 and purchase of property and equipment of
$661, offset by proceeds from a refundable deposit related to a terminated
acquisition in the amount of $394,667.  Cash used in investing
activities for the six months ended September 30, 2009 decreased by
$907,508 or 100% compared to the same period in 2008.


19





Financing
activities





Cash
provided by financing activities amounted to $277,705 for the six months ended
September 30, 2009, which represents the proceeds from related party
advances. Cash provided by financing activities amounted to $56,723 for the six
months ended September 30, 2008, which consists of proceeds from related
party advances in the amount of $64,622, offset by payment of our bank loans of
$7,899. Cash provided by financing activities increased by $220,982 or 390%
compared to the same period in 2008.





Off-Balance
Sheet Arrangements





As of the
date of this report, we do not have any off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that are
material to investors. We have not entered into any other financial guarantees
or other commitments to guarantee the payment obligations of any third parties.
We have not entered into any derivative contracts that are indexed to our shares
and classified as shareholder’s equity or that are not reflected in our
consolidated financial statements. Furthermore, we do not have any retained or
contingent interest in assets transferred to an unconsolidated entity that
serves as credit, liquidity or market risk support to such entity. We do not
have any variable interest in any unconsolidated entity that provides financing,
liquidity, market risk or credit support to us or engages in leasing, hedging or
research and development services with us.





Issuance
of Common Stock




On March
16, 2009, we issued 100,000 shares of common stock to a consultant. Our contract
with this consultant has a term of one year, and the unearned stock compensation
will be amortized as expense over one year term from the date of the grant. The
amortization of this stock compensation for the quarter ended June 30, 2009 was
$12,750.




On April
1, 2009, we issued 39,216 shares of common stock to a law firm for services
rendered and recorded at its fair value of $20,000.




Inflation





Inflation
has not had a material impact on our business and we do not expect inflation to
have a material impact on our business in the near future.





ITEM
3 - QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





We are a
“smaller reporting company” as defined by Regulation S-K and as such, are not
required to provide the information contained in this item pursuant to
Regulation S-K.





ITEM
4T - CONTROLS AND PROCEDURES




As of the
end of the period covered by this report, the Company carried out, under the
supervision and with the participation of the Company’s management, including
its Chief Executive Officer and Chief Financial Officer, an evaluation of the
effectiveness of the design and operation of the Company’s disclosure controls
and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) in ensuring that information required to be disclosed by
the Company in its reports is recorded, processed, summarized and reported
within the required time periods.  In carrying out that evaluation,
management identified a material weakness (as defined in Public Company
Accounting Oversight Board Standard No. 2) in our internal control over
financial reporting regarding a lack of adequate segregation of
duties.  Accordingly, based on their evaluation of our disclosure
controls and procedures as of September 30, 2009, the Company’s Chief Executive
Officer and its Chief Financial Officer have concluded that, as of that date,
the Company’s controls and procedures were not effective for the purposes
described above.


20





There
were no changes in our internal controls over financial reporting identified in
connection with the evaluation that occurred during the three months and six
months ended September 30, 2009 that has materially affected, or is reasonably
likely to materially affect, our internal controls over financial
reporting.


21


PART
II





Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS





Pursuant
to a Joint Written Consent to Action of the Board of Directors and Majority
Stockholders in Lieu of a Special Meeting dated August 13, 2009, holders of the
requisite majority of our then outstanding shares of voting securities approved
the adoption of our 2009 Incentive Plan and authorized our management to take
action necessary to prepare, execute and file with the SEC a Registration
Statement on Form S-8 for the purpose of registering shares of our common stock
to be distributed to such plan.





Item
6.  EXHIBITS





Item
                    Number
                  
                  Description(31)
                  
                  Section 302
      Certification31.1*
                  
                  Certification
      of Registrant’s Chief Executive Officer pursuant to Rule
      13a-14(a)/15d-14(a) of the Securities Exchange Act of
  1934.31.2*
                  
                  Certification
      of Registrant’s Chief Financial Officer pursuant to Rule
      13a-14(a)/15d-14(a) of the Securities Exchange Act of
  1934.(32)
                  
                  Section 906
      Certification32.1*
                  
                  Certification
      of Registrant’s Chief Executive Officer pursuant to Rule
      13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C.
      Section 1350.32.2*
                  
                  Certification
      of Registrant’s Chief Financial Officer pursuant to Rule
      13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C.
      Section 1350


____________________


* filed
herewith


22


SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.





Dated:
November 13, 2009


/s/ Mingli YaoMingli
      YaoChief
      Executive Officer and Chairman/s/
      Li LiLi
      LiChief
      Financial Officer





EXHIBIT
INDEX




EXHIBIT
NO.




31.1
            
            Certification
      of Chief Executive Officer, pursuant to Rule 13a-14 and 15d-14 of the
      Securities Exchange Act of 1934.31.2
            
            Certification
      of Chief Financial Officer, pursuant to Rule 13a-14 and 15d-14 of the
      Securities Exchange Act of 193432.1
            
            Certification
      of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.32.2
            
            Certification
      of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.